ABSTRACT:

Despite the progress made in the last four decades of economic planning; budget or fiscal deficit has remained a constant feature of the Nigerian budget plan. Fiscal balance as a measure of macroeconomic health must be planned with an objective of achieving acceptable rate of growth, low unemployment rate, reasonable and sustained foreign reserve as well as a rational degree of price stability. Nigeria is yet to experience any of these. However, economists agree that there seems to be a relationship between fiscal deficit and macroeconomic variables like; growth, interest rate, trade deficit, money supply and exchange rate among others. The above notwithstanding, there is ongoing debate as to whether the relationship between budget deficit and economic growth is positive, negative or neutral. In the light of the above and its implications to economic planning and other related issues, this paper posits that the interplay of other variables such as; non-oil revenue, money supply, interest rate and exchange rate along with fiscal deficit may give a better understanding of the budget deficit situation in Nigeria. Consequently, the paper examines available data for the last five decades using standard econometric methods to build an augmented neoclassical growth model that helps to examine and effectively study the growth-budget deficit problem. More specifically, a Vector Error Correction Model (VECM) is fitted to the data. Also a graph of the Gross Domestic Product Per Capita (GDPPC) - budget deficit is used to examine if there is limit to the extent budget deficit can grow GDPPC. The graph of GDPPC against budget deficit showed sign of possible limit afterN4250 mark. Other results show that; a one year lag ingrowth (D(logfjDPPC(-l))), lending rate and two year lag in D(LR(-2)), D(logM2(-2)) and D(logNOR(-2)) are statistically significant at 10% and below. However, we found only overall budget deficit to best artistically significant. The models were found to be good for both long run and short run equilibrium relationship and hence good for policy formulation and implementation. The paper concludes that current budget deficit do not significantly grow the economy but overall budget deficit does. Combining this information with the knowledge that it may have a limit to the extent that it helps the economy grow, it can only be said that there is the need to strike a balance between the two in the planning process in order to maximize returns to the society.